An export sale is not complete until the money arrives. Distance, unfamiliar legal systems and the practical impossibility of pursuing a small debt overseas mean payment security deserves more attention than it usually gets.
The payment methods, from most to least secure
Cash in advance. Complete security for you and maximum risk for the buyer. Achievable for small orders, new relationships and high-demand products; uncompetitive for larger transactions.
Letter of credit. The buyer’s bank undertakes to pay against compliant documents. Strong security, and it costs fees and administrative effort.
The critical feature: payment depends on documents matching exactly, not on the goods being delivered. Discrepancies — a date outside the window, a description not matching the credit, a missing endorsement — entitle the bank to refuse. A high proportion of first presentations are rejected for discrepancies, so the documentary discipline is the whole exercise.
Documentary collection. Documents released through banks against payment or acceptance. Cheaper than a letter of credit and weaker — the bank does not guarantee payment, only controls document release.
Open account. You ship, then invoice on terms. Most competitive commercially and least secure. Standard in established relationships and in markets where it is expected.
Reducing risk on open account
- Credit-check the buyer. International credit reports are available and inexpensive relative to a bad debt.
- Trade credit insurance, which covers non-payment and is worth pricing for significant exposures.
- Start small and extend terms as the relationship proves itself.
- Retention of title, which is of limited practical use across borders but costs nothing to include.
- Partial deposit, which shares risk rather than eliminating it.
Currency
Selling in a foreign currency exposes you between quote and payment. The exposure begins when you quote, not when you invoice — a fixed-price quote valid for thirty days is an unhedged position for thirty days.
Tools: forward exchange contracts fixing the rate for a future date, foreign currency accounts allowing you to hold receipts and pay costs in the same currency, and natural hedging by matching revenue and cost currencies.
Hedge committed exposures rather than taking a view on direction. A business that hedges when the rate looks good and does not when it does not is speculating with working capital.
Compare the all-in rate rather than the headline — spreads vary substantially, and non-bank foreign exchange providers are frequently cheaper for straightforward conversions.
Withholding tax
Some countries require the buyer to withhold tax on payments to overseas suppliers, particularly for services and royalties. The rate depends on the country and any applicable double tax agreement.
Build it into pricing, and obtain the documentation evidencing the withholding so you can claim a foreign tax credit in New Zealand.
Payment fraud
Invoice fraud in international trade is common and follows a consistent pattern: an attacker gains access to email, watches the conversation, and at the right moment sends altered bank account details.
The control that works is procedural rather than technical. Verify any change of bank account details by phone, using a number you already hold, before paying or before accepting new details from a supplier. Not by replying to the email. Make this a rule for everyone including the owner.
Multi-factor authentication on email is the other essential control, because email access is what enables the whole attack.
Incoterms and payment interact
The Incoterm determines when risk transfers and who controls the documents, which affects your payment position.
State the term, the named place precisely and the edition — Incoterms 2020 remains current. Avoid DDP unless you understand what acting as importer of record in the buyer’s country involves, and be cautious with EXW, which makes the buyer responsible for export clearance from New Zealand.
If payment does not arrive
Act quickly. Options include using your freight forwarder or shipping line to control release of goods where documents allow, engaging a collection agency operating in that market, and arbitration if the contract provides for it.
Litigation in a foreign court is usually uneconomic for anything but large amounts, which is why the contract terms and payment mechanism chosen at the start matter more than remedies afterwards.
NZTE publishes exporter guidance including payment methods, MFAT publishes market reports, and the banks publish trade finance material.
General information only, not financial advice.
